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Analysis
Chapter 10 Appendix
Less than 3
units of
machinery
and less than
4 units of
labor
MPlabor
Slope =
MPmachine
= Marginal rate of substitution
q = min(x, y)
■ usual case: bowed away from the origin
Isocost curve
slope is -w/r
The least-cost
method of production
method of production
25 P = £20 000 K
W = £10 000
20
Units of capital (K)
15
TC = £200
000
10 TC = £300 000
5 TC = £400 000
0 TC = £500 000
0 10 20 30 40 50
method of production
25
20
s
Units of capital (K)
TC = £500 000
15
10
5 TC = £400 000
r
0
0 10 20 30 40 50
t
TPP1
TPP5
TPP4
TPP3
TPP2
TPP1
O
McGraw-Hill/Irwin Units of labour
© 2004(L)
The McGraw-Hill Companies, Inc., All
Rights Reserved.
Finding the maximum
output for a given total
cost
Units of capital (K)
Isocost
TPP5
TPP4
TPP3
TPP2
TPP1
O
McGraw-Hill/Irwin Units of labour
© 2004(L)
The McGraw-Hill Companies, Inc., All
Rights Reserved.
Finding the maximum
output
r for a given total
costs
Units of capital (K)
u TPP5
TPP4
v TPP3
TPP2
TPP1
O
McGraw-Hill/Irwin Units of labour
© 2004(L)
The McGraw-Hill Companies, Inc., All
Rights Reserved.
Finding the maximum
output
r for a given total
costs
Units of capital (K)
K1
t
u TPP5
TPP4
v TPP3
TPP2
TPP1
O L1
McGraw-Hill/Irwin Units of labour
© 2004(L)
The McGraw-Hill Companies, Inc., All
Rights Reserved.
Combining Isoquant and
Isocost Curves